Some of the entries in last year’s top ten list would have made this year’s list as well. Here is how they fared during the last 12 months.

News Corp. (2011: #1)

The News Corp. phone hacking scandal continued unabated. Former tabloid editors Rebekah Brooks and Andy Coulson were accused by British prosecutors of conspiring to pay public officials in exchange for information. Later in the year, the final report of the Leveson Inquirycriticized News Corp. as follows: “Most responsible corporate entities would be appalled that employees were or could be involved in the commission of crime in order to further their business. Not so at the News of the World.” The report also proposed a new arbitration scheme conducted by a new regulator. In December, News Corp. chair and CEO Rupert Murdoch announced a proposed split of the company into a publishing and a bigger media company. The publishing company will retain the name News Corporation and will consist of newspapers, including The Wall Street Journal, The New York Post, and Harper Collins. Mr. Murdoch will serve as chairman. The bigger company will be called Fox Group and will include Fox Broadcasting, 20th Century Fox and cable channels like Fox News and FX. It will be led by Chase Carey, currently News Corporation’s president and chief operating officer.

TEPCO and the Japanese Government (2011: #2)

A series of reports by the Japanese government as well as independent panels harshly criticized Tokyo Electric Power Co. (TEPCO), the operator of the Fukushima nuclear power plant, as well as Japanese regulators for insufficient preparedness and inadequate crisis response measures. Both TEPCO and the Japanese government were also criticized for lack of transparency and timely release of information. Anti-nuclear power sentiment in Japan has grown strongly over the last year. Only two of the country’s reactors are online and Japan’s new nuclear regulatory body is in the process of issuing new regulations. That said, the recent parliamentary elections awarded the traditionally pro-nuclear LDP a majority of seats. How this will affect Japan’s new regulatory landscape and its nuclear policy remains to be seen.

Penn State (2011: #3)

Another horrific year for Penn State. Jerry Sandusky was found guilty on 45 of 48 counts of sexual abuse and sentenced to 30-60 years in prison. The scandal had far-reaching outcomes for the university. The July 2012 report of an independent investigation led by former FBI director Louis Freeh stated that former Penn State University President Graham Spanier and legendary Penn State football coach, the late Joe Paterno, along with Athletic Director Timothy Curley and school vice president Gary Schultz, had known about allegations of child abuse on Sandusky’s part as early as 1998, and were complicit in failing to disclose them. In doing so, Freeh stated that the most senior leaders at Penn State showed a “total disregard for the safety and welfare of Sandusky’s child victims” for 14 years and “empowered” Jerry Sandusky to continue his abuse.

Following the report, the NCAA imposed sweeping penalties on Penn State — among the most severe ever imposed on an NCAA member school — including a fine of $60 million, a four-year postseason ban, scholarship reductions and vacating of all victories from 1998–2011. In doing so, NCAA President Mark Emmert stated that the sanctions were levied “not to be just punitive, but to make sure the university establishes an athletic culture and daily mindset in which football will never again be placed ahead of education, nurturing and protecting young people.” The Big Ten Conference subsequently imposed an additional $13 million fine. Former Penn State officials Spanier, Curley and Schultz have since been brought up on criminal charges for their role in the abuse scandal.

German Politicians (#4)

More problems for German politicians. In addition to further claims of plagiarism against various politicians (including the current minister of education and research), German Federal President Christian Wulff had to step down after being investigated for corruption. While the actual amounts (by international standards) seemed small (paid vacations, a favorable mortgage, etc.), they raised major questions of character and judgment. Moreover, the former President’s efforts to diffuse the issue landed him in more hot water. At the end, it was all too much.

ERGO (2011: #5)

Having survived the embarrassing revelations regarding a 2007 “incentive trip” for its top salesmen which involved the hiring of prostitutes in Hungary as well as various other allegations, German newspaper Handelsblatt reported that Ergo had paid for employees to visit a swingers club in Jamaica and a brothel on the Spanish island of Majorca. The company had previously stated that the 2007 event had been a singular incident. Confronted with the new revelations the company first argued that the cases are not comparable and engaged in a brief battle with the newspaper, but later promised improved transparency, among other things providing a website with details on any “inappropriate behavior.”

Netflix (2011: #6)

After the Qwikster disaster, Netflix stock somewhat recovered to about $94, better than last year’s $67 per share, but still far from its height at $300 reached before last year’s crisis. However, a July Facebook posting by CEO Reid Hastings boasting of exceeding 1 billion hours of video streaming in a month for the first time led to a statement by the SEC that it may sue the company. This led to an interesting debate about what disclosure means in the digital age.

HP (2011: #7)

HP certainly would have made the 2012 list. This time over its Autonomy acquisition, now discussed as a candidate for “worst corporate deal ever,” possibly edging out the previous leader: the Time Warner-AOL merger. HP is suing former Autonomy executives and auditors over alleged misrepresentations, while investors are suing HP.

Fifa (2011: #8)

The Fifa corruption scandal is continuing, though at a lower level of intensity. The person in charge of investigating corruption at Fifa reported “resistance,” especially by some older members. The investigative panel also asked European lawmakers to get involved.

The U.S. Government (2011: #9)

Having narrowly avoided disaster over the debt ceiling, the U.S. government now tries to avoid the “fiscal cliff,” a legacy problem created by the negotiated solution of the debt ceiling crisis. We’ll keep our fingers crossed.

To mark the first year of the Reputation Rules: The Blog, we are publishing our list of the Top Ten Reputational Crises of 2011. The idea is to not just look back on these events, but also to draw some general lessons from these cases. There are many more that could have been added (Olympus, Johnson & Johnson, SC Johnson, German Federal President Christian Wulff, Dominique Strauss-Kahn, the Governator, and many more), but here are the ones that made the list.

Image Courtesy Politico

News Corp.

What started out as a sordid story about hacking into voicemail accounts and other personal information has turned to an annus horribilis engulfing not only the Murdoch media empire, but also the British government and Scotland Yard: a British Watergate. After a year full of arrests, resignations and investigations, News Corporation and the Murdoch family are facing the biggest crises in their history. The BSkyB acquisition had to be abandoned and shares have plummeted. James Murdoch, the company’s likely heir apparent, is now in the crosshairs of government investigations to determine whether he knew more about wide-spread hacking than originally admitted. Observers have called his position “untenable” and the investigations having reached a “tipping point.”

Nobody knows where the crisis will end. But it’s already offering a few lessons.

First, newspapers and media companies are especially bad at managing reputational crises. This is not only illustrated by the News Corp. crises but other cases such as the Jayson Blair scandal at the New York Times or “Memogate” at CBS’ 60 Minutes. Operating in an intensely politicized atmosphere in their daily lives, news organizations typically interpret any criticism immediately as another politically motivated act and miss the underlying business issue—a crisis that threatens competence and integrity, which are the pillars of news organizations. The response is often defensiveness, which further erodes trust.

Second, good governance structures pay off in a crisis. Ineffective boards or ill-placed personal loyalties are a problem in good times; in bad times they are a disaster.

Third, dormant issues can very quickly become life-threatening crises as public perception tends to change rapidly. One of the striking aspects of the News Corp. scandal is that the allegations of hacking into voicemail messages and private accounts and bribing police officers were ongoing for years. But the dynamics dramatically changed when the reports related to Milly Dowler (and other similar cases such as murder victims or soldiers killed in action) surfaced in early July. The horrific case of Milly Dowler and her family immediately triggered reactions of sympathy for the victims and disgust and outrage for the new villains: News of the World, News Corp. and Rupert Murdoch.

Fourth, once a company loses public opinion, politicians will adjust, turning from friends to enemies in a heartbeat. At that stage politicians and public officials need to save their own skin amidst allegations of inaction or complicity.

Whenever disaster strikes, companies and governments are not only criticized for their immediate handling of the crisis, but also their ability to reassure the public. Maintaining trust during a crisis is just as important as solving the crisis at an operational level. Both TEPCO and the Japanese government were criticized for lack of transparency and timely release of information.

What also became apparent is that leaders are not only in the spotlight for their current conduct. Indeed, their preceding actions (or inaction) too come under heavy scrutiny. TEPCO’s history of safety violations quickly took center stage, while the Japanese government was criticized for lack of oversight and a too cozy relationship with the nuclear power industry.

The revolting details of the Penn State case have dominated U.S. headlines over the last months. While the future of the protagonists in this sordid tale is now decided in the courts there are important lessons here for any business, but especially for universities and other non-profits.

First, “crimes of omission”, i.e. looking the other way, not acting forcefully or simply the lack of appropriate processes are unacceptable in today’s business environment. An organization’s reputation critically depends on the decisions of its people, including what they neglect to do. Lack of awareness, missing processes, or confusion over values is deadly. No institution can simply count on its members to “do the right thing”.

Second, universities (and other non-profits) are especially at risk when those entrusted to them are victimized. While for-profit companies are typically thought of as being competent—but not necessarily caring—nonprofits are seen as being caring, but not always competent. These perceptions are considered a given; they are “table-stakes”. Losing them threatens the very core of the institution.

Finally, sage words on the reputational risk of universities from a somewhat unlikely source: a rating agency. In its evaluation of Penn State’s credit rating, Moody’s Investors Service stated the following:

“Higher education is first and foremost a business that is driven by reputation…Student demand, the attraction of faculty, and the ability to draw donations are all based on reputation.”

Image Courtesy Speak Ethics

Politicians and Plagiarism

Our first German crisis takes us to an unlikely domain: doctorates for politicians. Many German politicians have obtained doctorates, frequently in the social sciences, history or law. Last year saw a wave of plagiarism allegations against German politicians. The most prominent casualty was the German defense minister Karl-Theodor zu Guttenberg (above), who not only lost his “Dr.” designation but also had to resign from the German government and (perhaps temporarily) exit political life.

The scandal also heralds a subtle shift in the control over scientific expertise and quality. The initial charges and evidence were the result of a crowdsourcing effort on a Wiki called “Guttenplag”. Guttenberg’s degree-granting university (the University of Bayreuth) found itself first on the back foot, but then stated that the minister had “extensively violated academic standards and intentionally cheated.”

Our next two crises illustrate the risks of brand-driven strategies: you live by the brand, you die by the brand!

ERGO

Crises can come from anywhere, and just when you think you’ve seen it all there comes an example that is truly jaw-dropping. Such is the case of the German insurer Hamburg-Mannheimer, now part of ERGO, which itself is owned by the insurance giant Munich Re, which counts Warren Buffett as an investor. A staple of German advertising lore, it featured a long running advertising campaign featuring a conservative insurance agent “Herr Kaiser” and his trademark greeting, “Nice to see you.” Overall, it presented a reliable, if a little boring image of stability and personal attention.

Boring no more. After its acquisition, ERGO engaged in an aggressive advertising campaign with goals of defining itself as a consumer brand with a focus on trust, clarity, and transparency. In May 2011, however, the German press discovered and reported that Hamburg-Mannheimer had organized an “incentive trip” for its 100 best salesmen in 2007. The company had rented the famous Gellert Baths—an art deco spa in Budapest, Hungary—and hired about 20 prostitutes. The prostitutes wore color coded wrist bands to indicate which men (ranked by sales performance) were allowed to have sex with them. (Prostitution is legal in Hungary and Germany).

A few weeks later, the German press reported that during 2005-06 the company had overcharged 70,000 customers nearly $234 million for the so-called “Riester-Rente”, a state-subsidized retirement product. Subsequent reports suggested that errors may have been known to the company as early as October 2005. In addition, sales representatives allegedly had advised clients with existing life insurance policies to switch to accidental insurance policies. This resulted in higher commissions for sales representatives, but was frequently not in the financial interest of the customer.

The initial company response was slow and defensive, despite the fact that the company knew this was coming – a rare luxury in a reputational crisis. Three weeks after the initial report, and after intense pressure on the CEO, ERGO outlines new processes including the creation of a whistle-blowing hotline and the appointment of an external body to monitor operations and conduct regular compliance audits. The company also outlined its plan to create new guidelines for incentive schemes.

One of the more interesting aspects of the ERGO crisis was the apparent mismatch between brand positioning (a focus on trust and transparency) with an aggressive sales culture. Reputational ambition needs to be connected with reality on the ground. Otherwise, the next crisis is just around the corner.

It was a horrible year for Reed Hastings, Netflix’s CEO and Fortune’s 2010 “Business Person of the Year.” The stock is down almost 2/3 for the year, currently trading at about $69 per share after having reached $300 per share earlier this year. A calamitous change in its pricing model, followed by the “Qwickster” disaster, lead to a mass exit of subscribers. Netflix now expects a loss for 2012 and the web is suddenlyfull of “Netflix haters”.

This is a stunning fall from grace, but it illustrates a broader point. Brands are now largely about trust, but trust is fragile. When trust is violated (or perceived to be violated), trust quickly turns to betrayal, and passionate support to rage. Add to that the difficulty of operating in a (social) media environment with less and less control over the message customers receive, and this new brand fragility is not an exception, but a common risk that needs to be managed.

The next two crises have their roots in severe problems of governance (we could have added News Corp. to that list). Well-functioning governance structures are critical during a crises, and here they are the trigger for the crisis.

Image Courtesy SFGate

HP’s Board

A year after the controversial ouster of CEO Mark Hurd, HP’s board again made negative headlines, this time for its dismissal of Léo Apotheker, less than a year after his appointment and after endorsing his strategy for transforming HP. Again there were reports of leaks by board members and deep divisions within, leading CNN Money–among many others–to ask: “Is HP’s board the worst ever?”

Image Courtesy The Telegraph

FIFA

A year of corruption allegations, investigations, resignations, and the highly controversial reelection of FIFA president Sepp Blatter, all on the heels of a heavily criticized selection process for the World Cups of 2018 (to Russia) and 2022 (to Qatar). Blatter then had to apologize for controversial comments on racism in soccer, reigniting calls for his resignation and thorough governance reform.

We typically do not think of sports governing institutions as bodies in need of reputation management, but not only are their responsibilities broad (they determine rules, collect dues, negotiate TV and advertising contracts, sponsor local development initiatives, etc.), they are entrusted with ensuring the integrity of the game, and its history.

The U.S. Government

The reputation of countries is measured in different ways, bond ratings being only one of them. The U.S. political system has had a rough year. As the country watches another example of Congressional brinkmanship, many observers ask themselves how it could have come this far. There are many explanations for the ongoing inability of the U.S. political system to come to decisions, from the surge of the Tea Party to positioning for the 2012 Presidential Election. But down-to-the wire budget negotiations are nothing new to the U.S. political landscape. The worst consequences are mostly avoided, but sometimes bad outcomes result, as in the 1995 shutdown of the federal government. As a consequence, passports and visas were left unprocessed, national parks were closed, and veteran services curtailed.

Through its extensive set of checks and balances, the U.S. Constitution was designed to force policy makers into these bargaining situations. The need to find common ground between the president and the chambers of Congress would ensure moderate policies with broader support. Other democracies, such as Great Britain, lack this structure, as parliamentary democracies encourage unity between the executive and its supporting majority in parliament. There are pros and cons to each structure. A British Prime Minister can make far-reaching decisions without periods of extensive bargaining. This was last seen in the austerity measures passed in October 2010, which implemented far more radical cuts in the UK budget than discussed in the current U.S. debate. On the other hand, the possibility of radical change can lead to highly disruptive policy changes as different parties assume power, as seen in the waves of nationalization and de-nationalization of British industry in the 70s and 80s.

Such inefficient policy shifts are far less likely in a system of checks and balances, but in addition to the usual bargaining shenanigans known from any negotiations, there are unintended consequences that make the current situation particularly severe. In a paper with Roger Myerson, the 2007 Nobel laureate in Economics, we have argued that a system of checks and balance can create incentives for Congress to create inefficient decision structures. The argument goes as follows: in a bargaining situation each chamber wants to get the best deal for its members and their constituents. By creating internal veto players, such as powerful party leaders and committee chairs that need to sign off on any deal, the chamber can secure a better outcome for itself.

The problem is that having more players that need to agree makes a deal less likely. The consequences are fewer agreements and an inability to pass tough policies and gridlock. What can be done?

First, anything that creates bonds across chambers will be a positive step, whether these are joint committees or strong personal relationships. Second, voters that hold members of Congress accountable for failure change the incentives to engage in intransigent behavior. Third, moving from a system where all chambers have to agree with the president to one where only one chamber needs to sign off would create incentives to remove internal hurdles and lead to more efficient bargaining while maintaining the quintessential features of checks and balances.

This year’s installation of the demolition derby known as the U.S. primaries demonstrated the limits of managing reputational crises. Even the short-lived popularity of Herman Cain’s “9-9-9” tax proposal could not overcome ongoing allegations of sexual harassment and adulterous affairs, and feeble attempts of humor could not save Perry from his “senior moment”.

We are now witnessing the British version of Watergate. What started out as a sordid story about hacking into voice mail accounts and other personal information has now grown to engulf not only the Murdoch media empire, but also the British government (certainly the current one under David Cameron and, possibly, past ones), and Scotland Yard. Every day we see new resignations and arrests. Pundits, politicians, and journalists alike now deplore the decade-long stranglehold of Murdoch’s papers. Charges not only include hacking, but the bribery of police officers to derail ongoing investigations into the practices at News of the World and other tabloids. The resignation and subsequent arrest of former editor Rebekah Brooks and the resignation of Dow Jones CEO Les Hinton have cut deep into News Corp’s inner circle.

Already the British media is full of speculation of a possible arrest of Rupert Murdoch’s son James. And the public is awaiting the testimony of father and son on Tuesday. Across the Atlantic, U.S. politicians have asked for criminal investigations for violations of the Foreign Corrupt Practices Act and the FBI has been reported to investigate potential hacking into accounts of 9/11 victims.

It is clear that the Murdoch and News Corp. is facing the biggest crises in their history. The BSkyB acquisition has been abandoned and shares have plummeted. But now the very existence of the Murdoch empire is at stake; what’s more, the crisis has now reached deep into the venerable institutions of government, leading to resignations of John Yates, Metropolitan Police’s top counterterrorism officer and Paul Stephenson, commissioner of the Metropolitan Police. Pressure is mounting on Prime Minister David Cameron regarding his cozy relationship with Brooks and Murdoch and his appointment of News of the World‘s former editor Andy Coulson as communications director.

The most upsetting case pertains to Milly Dowler, a 13-year-old girl who was kidnapped and subsequently killed in 2002. News of the World is accused of not only listening to Dowler’s voice mail messages, but deleting messages in order to make room for new ones, which potentially interfered with the missing person investigation and provided Dowler’s family with false hope that the young teenager was still alive.

Nobody knows where the crisis will end. But while breath-taking in its speed and drama, the scandal followed a familiar script.

First, newspapers and media companies are especially bad at managing reputational crises. This is not only illustrated by the News Corp. crises but other cases such as the Jayson Blair scandal at the New York Times or “Memogate” at CBS’ 60 Minutes. Operating in an intensely politicized atmosphere in their daily lives, news organizations typically interpret any criticism immediately as another politically motivated act and miss the underlying business issue—a crisis that threatens the pillars of news organizations: competence and integrity. The response is defensiveness, which further erodes trust. What was required was a sense of transparency, empathy and commitment to set things right. After almost two weeks, News Corp. finally changed course and took some of the steps that should have been taken much earlier: an apology to the victims of the hacking scandal, the resignation of Rebekah Brooks, and a commitment to reform. But after weeks of fighting back and dismissing the concerns, these steps now look calculated and reactive.

Second, good governance structures pay off in a crisis. According to the New York Times, News Corp. stock routinely trades cheaper than comparable media companies’, commonly known as the “Murdoch discount.” In the aftermath, this “discount” has since hit 30%. Ineffective boards or ill-placed personal loyalties are a problem in good times, and in bad times they are a disaster.

Third, dormant issues can very quickly become life-threatening crises if the roles of the key actors change. One of the striking aspects of the News Corp. scandal is that the allegations of hacking into voice mail messages, private accounts, and bribery of police officers were known for years. But the dynamics dramatically changed when the reports related to Milly Dowler (and other similar cases such as murder victims or soldiers killed in action) surfaced in early July. Previous tabloid targets were celebrities and politicians, parties that could count on little sympathy from a jaded public. But the horrific case of Milly Dowler and her family immediately triggered reactions of sympathy for the victims and disgust and outrage for the new villains: News of the World, News Corp. and Murdoch.

Fourth, moral outrage and fear quickly turn public opinion. Once a company loses public opinion, politicians will adjust, turning from friends to enemies in a heart-beat. At that stage politicians and public officials need to save their own skin amidst allegations of inaction or complicity. Another illustration of the eternal law of politics: Nulli Permanentes Amici Nulli Permanentes Inimici. No permanent friends, no permanent enemies.